Hot topic: Cryptocurrencies

Cryptocurrency is a hot topic. From Elon Musk’s Twitter feed, to the neighbourhood barbecue, it’s not hard to find an opinion about crypto. Arguably, the most talked about cryptocurrency over the past decade has been Bitcoin – so popular that it was awarded 'word of the year' by the Australian National Dictionary Centre in 2013.

At CSC, we haven’t invested directly in commercial decentralised cryptocurrency, like Bitcoin, because of several risks to the value. These include:

• The material regulatory risk that governments either ban or limit the use of decentralised cryptocurrency for transactional purposes
• The fact that Bitcoin transactions are very expensive to make, energy greedy and slow to execute, making them as yet unsuitable as a medium of exchange. That energy intensity and the location of Bitcoin mining, is concentrated in countries where electricity is still primarily generated using coal and so it's very climate unfriendly
• It’s volatility – it really is a speculative digital asset and can have discreet price adjustments of 25% to 75%¹

Having said that, our customers do have a very small exposure to Bitcoin indirectly through some public companies in our portfolio and some of our Venture Capital investments. But it's actually very small – at less than 0.4% of our assets under management. This small exposure comes through:

• PayPal, given its decision to let its customers trade Bitcoin on its platform
• Tesla's direct investment in Bitcoin
• One of our external hedge fund managers, who took a very small beachhead exposure to ensure that we could properly understand, as an insider, the state of the market's infrastructure development in a real and timely way.

While much is made of the limited supply of Bitcoin, with the implication being for sustainable price depreciation, we're not convinced by this argument at this stage. Because the supply of alternative cryptocurrency isn’t limited, and new versions pop up regularly – just to name a few there's Ethereum, Litecoin, Tether, Solana, Stellar, Cardano, and even Dogecoin, which was described as a joke by its creators.

To date, prices of all of these cryptocurrencies have been highly correlated, and dominated by speculative activity. By contrast, the underlying blockchain technology is a very significant development that has multiple applications beyond the support of cryptocurrency trading, and we're monitoring developments there very closely. The institutional quality of the infrastructure that enables the use of cryptocurrency, the composition of market participants and government attitudes towards its proliferation is something that we're all focused on.

There's quite a difference between these decentralised cryptocurrencies and the centralised versions, which don't have the same potential for wholesale disruption of our global monetary system. The Bank for International Settlements, in conjunction with roughly seven other central banks, have drafted a principle for developed countries central bank digital currency use and that really focuses on constraining the use of these currencies, to make sure they don't interfere with the existing commercial banking systems and the way our monetary policies operate.

China, Singapore, Canada, Sweden, for example, are very progressed in terms of central bank digital currency development and these are centralised, scalable and will be in use around the world. So it's very hard today to define the boundaries on these developments and their influence on the intermediation of credit, on monetary policy, and on capital flows. But it's fair to say that the monetary system operating a decade from now will be very different to today and that bears our focus.

We are watching that carefully.